September 10, 2008

Global Market Comments for September 10, 2008

1) Lehman (LEH) held its much anticipated conference call. The bottom line is that all of the saleable parts will be sold and the toxic waste will remain with LEH on a $600 billion balance sheet. The Q3 loss is $3.9 billion on $5.6 billion in net mark to market losses. A majority stake in Neuberger Berman will be sold. The commercial real estate division will be spun off as a separate public company in Q1 2009. Book Value is $27.29/share, meaning that the company is selling at a breathtaking 73% discount to book value. No foreign capital has been raised.  The stock traded down to $7.40 and then back up to $8.40. Take out asset management and real estate from LEH and there is nothing left but an empty shell. The bond business that was the core of LEH's remaining business model no longer exists. Dick Fuld might as well try to get an above market premium for a buggy whip manufacturer. There is no doubt now that LEH is going down. The only unknown is the cause of death that will appear on the death certificate.

2) Bill Gross says that Newport Beach based PIMCO, with $829 billion in assets, the largest bond fund manager in the world, made $8 billion on Monday on the Fannie Mae and Freddie Mac bail outs. Great trade Bill!

3) OPEC announced a surprised production cut of 500,000 barrels/day and crude prices went down. The reason: China announced a big drop in auto sales last month. $60 here we come!

4) The Air Force announced that it was canceling its open bidding for a new tanker aircraft, saying they cannot get a result before the next change in administration. This is a huge win for Boeing (BA), which had lost an earlier contest against Airbus backed Northrop Grumman (NOC). BA is down today, as its machinists' strike extends to its first week.

5) Ford has launched its Fiesta ECOnetic diesel car, which will get 65 miles/gallon. However, the car will only be available in Europe because of regulatory and cost reasons.

6) Commercial real estate is now facing a credit crisis. The market is seizing up because of the lack of financing, so sellers are holding properties back from the market. While stable rents and cash flows are supporting valuations fairly well, those facing imminent debt rollovers are being forced to sell properties at distress prices. This is the only way they can dodge the bullet of large negative cash flows caused by the higher cost of new borrowing. Investors are especially worried about those properties with large retail exposure.

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